Behind the Kerry smokescreen: Lessons on Climate Change for Indian insurers!

John Kerry’s visit to talk India into containing its carbon footprint – first demands some answers from the United States. “We believe that this exercise by the US government is a smokescreen to hide its own long record of inaction on climate change and its continual attempt to pass on the burden of climate change mitigation to other countries, especially those of the Global South that are far less equipped than the US to undertake radical energy transitions”, says a statement by Teachers Against the Climate Crisis (TACC).

Having said that, there are lessons to be learnt from the far-reaching actions unleashed by the Biden administration including those to tame its insurance industry. Banks, asset managers and insurers have for long been the critical money pipeline for fossil fuel. If the Climate Crisis must be mitigated – that is where the action ought to begin.

Seeking answers from its insurers

Nothing can better demonstrate the resolve and urgency of the administration to rein in the US insurers from aiding and abetting the Climate Crisis than a letter sent out to CEOs of eight major insurance companies. This is signed by four Democratic party senators including Elizabeth Warren. “In order to better understand your fossil fuel underwriting and investment policies, we are requesting that you answer the following questions by April 16, 2021.

1. Have you studied how your company’s annual claims and premiums will evolve as climate-related losses burgeon over the coming decades? Which climate scenarios have you studied?

2. Have you conducted a stress test of your company’s exposure to fossil fuel assets? Which scenarios have you used? What did any stress tests reveal about your company’s exposure to fossil fuel assets?

3. How are your company’s fossil fuel underwriting and investment policies consistent with your broader commitments to sustainability?

We write you regarding your underwriting and investment policies pertaining to coal and other carbon-intensive projects such as oil and gas production from tar sands and in the Arctic and Amazon. As the leader of a major insurance company, you know the significant financial and economic risks climate change poses to both underwriting and investment.”

The letter then goes on in great detail covering the following:

Economists, central bankers, financial regulators, asset managers, investors, insurance analysts, credit rating analysts, investment bankers, real estate professionals, and scientists have produced an enormous trove of research suggesting that climate change and the failure to plan for an orderly transition to a low carbon economy are capable of producing staggering economic losses. These losses relate to the physical risk of damages caused by climate change or the transition risk of stranded fossil fuel assets as the economy transitions to low-carbon sources of energy.

It goes without saying that the physical risks of climate change pose a serious threat to insurers, both on your assets side and on your claims side. There is ample data that rising sea levels and increased storm intensity and activity will do substantial damage to coastal property values. These warnings have come from a variety of experts, including Freddie Mac, the industry publication Risk & Insurance, and the Union of Concerned Scientists.

In addition to sea level rise and coastal storms, more frequent and intense wildfires, riverine floods, droughts, and heatwaves will also result in very large losses, much of them insured. Indeed, the management consultancy McKinsey warns of massive physical risks that will increase “nonlinearly” as the earth continues to warm.

Transition risk is also significant for insurers that hold large stakes in fossil fuel assets. One economic paper reports “economic literature combined with industry practices suggest the presence of persistent market inefficiencies for fossil fuel reserves, so these assets are likely to be stranded and mispriced, i.e. a carbon bubble exists ….” Another finds “the magnitude of … stranded assets of fossil fuel companies (in a 2 degrees C economy) has been estimated to be around 82% of global coal reserves, 49% of global gas reserves, and 33% of global oil reserves.”

The market value of fossil fuel reserves that cannot be burned is “around $20 trillion,” according to the World Bank. A study done by the European think tank CEPS predicts that “fossil fuel companies altogether would see their market value fall by half.” Central banks are also increasingly concerned about transition risk.

The Bank of England has warned, “investments in fossil fuels and related technologies . . . may take a huge hit.” The Bank for International Settlements also warned of stranded fossil fuel assets in its recent report on climate-related economic risks. And a report from 34 central bank presidents warned that “estimates of losses […] are large and range from $1 trillion to $4 trillion when considering the energy sector alone, or up to $20 trillion when looking at the economy more broadly.”

Concern over the risk that stranded fossil fuel assets pose to insurers is not merely academic. A stress test of European financial institutions revealed that some were over-exposed to fossil fuel assets and could be at risk should these assets plunge in value. Indeed, the Bank of England has become so concerned about systemic risk associated with stranded fossil fuel assets that it ordered the life insurers it regulates to perform stress tests including a stranded fossil fuel asset scenario. American regulators are also beginning to signal they take climate-related financial risks seriously. Federal Reserve Bank Governor Lael Brainard warned of climate-related shifts in asset values and “abrupt tipping points and significant swings in sentiment” in the Fed’s most recent biannual financial stability report.

In response to these risks, an increasing number of your competitors have stopped underwriting coal and other fossil fuel projects and/or restricted their investments in coal and certain dirty and environmentally damaging oil and gas projects such as tar sands.

It’s in our interest to act

A small beginning has been made by select banks in the form of self-disclosure. Extreme weather puts debt worth $84 billion at risk at India’s top banks, according to Carbon Disclosure Project (CDP) – India. The country’s largest lender, HDFC Bank, IndusInd Bank and Axis Bank are among the institutions that reported climate risks to CDP in 2020, it said in its recently released annual report. While a lot more banks need to join this exercise, a small beginning has been made.

The Indian insurance regulator (IRDAI) is yet to initiate Environmental, Societal and Governance (ESG) as the way forward. The total investment corpus of all Indian insurers now adds up to US $ 600 billion. The physical and transition risks of the insurers need to be quantified. There is enough science pointing at the growing storms both along the east and west coasts, floods and droughts; sinking cities; the rising heat and humidity in the northern plains; the shrinking glaciers in the ‘third pole’ region and its grave implications for the river systems; increased deforestation and threats to bio-diversity across the country. Despite a low per capita contribution, we are already the third largest polluter in the world. Many of our cities have terrible Air Quality Indices. By insuring anything that contributes to these woes – insurers provide a further blow to sustainability.

Life Insurance Corporation of India (LIC) – the largest insurer – continues to invest significantly in fossil fuel business – including the NTPC and Coal India. Given all its environmental vulnerabilities, it is in the country’s best interest to act. And act must the insurers who may be aiding and abetting the Climate Crisis. While we should be mindful of the Kerry smokescreen and push him back, we cannot be mindless to what the US has finally started doing – something it ought to have begun three decades ago.